Should I get an LLC or just umbrella insurance for Ohio rentals?

[Dennis Li]

Hi professionals and fellow investors!

I've just purchased my first property, and I have a question for Ohio state long term rental properties. I have just closed a 4-plex with tenants inside. All the tenants are recruited by the previous seller, so I don't know their credits and don't know their personalities. Now I want to protect myself from any potential lawsuits from them.

I'm debating between an umbrella insurance and a LLC. Here are my thoughts, and why suggestion would be greatly appreciated!!

1. Regarding annual cost, LLC is better. To get an umbrella that covers my net worth, it would cost me $600 more every year. Whereas Ohio states does not have renewal fee for an LLC, except a one-time setup fee of $99, plus a fee to get lawyer to setup and transfer deed for me for $1000 in total.

2. Regarding total potential loss, Umbrella is better. Per my understanding, if I have an Umbrella that covers my net worth, then even if I lose on a lawsuit, I will not lose any asset. However, losing a lawsuit may cost me the property, which is worth about $200K.

3. Regarding daily operating, Umbrella is better. I don't need to worry about anything with Umbrella, but for LLC, I need to follow the operation agreement and keep in mind not mixing personal and business bank account.

I'd like to know what are your thoughts, and how do you make decision in this case?

Thank you very much!!

[Clint Coons]

@Dennis Li

Dennis, your question is very common among real estate investors, and it's an important one. Insurance is crucial, and you should always ensure your property is properly insured, whether it's held in an LLC or your personal name. Having insurance provides peace of mind, but it's equally important to carefully review your policy to understand what is excluded from coverage. Here is a detailed list of common exclusions in landlord policies that can pose significant risks to property owners:

Toxic Mold & Environmental Contamination – Most policies exclude claims related to mold, asbestos, fentanyl, viruses, bacteria, lead paint, or other environmental hazards. For example, a client was sued for mold contamination that resulted from a tenant improperly installing their own washing machine, leading to water damage and mold growth. 

Dog Bites from a Tenant’s Dog – Many landlord policies exclude liability for injuries caused by a tenant’s dog, especially if it is considered a restricted breed. In one case, a client’s Rottweiler, which was chained in the backyard, bit a neighbor who was trying to save her small dog after it attacked the Rottweiler. 

Criminal Acts or Intentional Misconduct – Insurance does not cover claims of negligence if the alleged act was intentional, such as wrongful eviction, harassment, or assault. For instance, one client is currently dealing with a claim where a plumber sent to repair a toilet was accused by the tenant of sexual harassment. 

Fair Housing & Discrimination Lawsuits – Claims involving discrimination, wrongful eviction, or violations of the Fair Housing Act often require separate coverage. Without this additional protection, landlords could face significant legal costs and damages in the event of a lawsuit.

Tenant Injuries Due to Poor Maintenance – If a tenant is injured because of known maintenance issues, such as broken stairs or faulty wiring, and negligence is proven, insurance may not cover the claim. One client is currently being sued for failing to remediate standing water in a crawlspace. The client was aware of the issue and attempted to fix it but did not fully resolve the problem, which resulted in an environmental hazard and tenant complaints.

Bed Bug & Pest Infestation Lawsuits – Most landlord insurance policies exclude coverage for pest infestation lawsuits, such as bed bugs, roaches, or rodents. For example, a client faced a lawsuit after attempting to remediate a bed bug infestation, but the tenant refused to allow the exterminator into the apartment.  

Contractor or Worker Injuries – If you hire an unlicensed worker, such as a handyman or plumber, and they get injured on your property, you may be liable unless you have workers’ compensation or a separate policy in place. One client hired a contractor whose license had lapsed. During a roofing job, the contractor’s brother-in-law fell off the roof and tragically died.  

Personal Injury & Defamation Claims – Standard landlord policies usually do not cover claims for libel, slander, or invasion of privacy. For example, if a tenant sues for illegal surveillance or damage to their reputation, you may be left entirely exposed to financial liability.

Many of these exclusions carry the potential for significant damages. I often view using an LLC as a preventative measure. While the likelihood of being sued may feel small, the consequences of a lawsuit can be severe. In my 17 years of real estate investing, I have not been sued once, despite experiencing major property damage—such as two homes burning to the ground due to faulty wiring and a tree collapsing onto a master bedroom while a tenant was sleeping. Thankfully, no one was injured, but had I not been so fortunate, I would have faced serious financial risk without the protection of an LLC.

Based on my experience working with many clients who have been involved in lawsuits, I can confidently say that LLCs work. They offer a layer of protection that can shield you from personal liability. Another critical point to consider is that even if a claim is covered under your insurance policy, having an asset protection plan in place can discourage attorneys from seeking the sun, moon and stars as damages. 

Lastly, take a close look at your umbrella policy and ensure it does not rely on your landlord policy for coverage. In some cases, if the underlying policy does not cover the claim, the umbrella coverage may not apply either.